Good Investing is a Solitary Practice, Three

Good Investing is a Solitary Practice, Three

The solitary investor keeps his ideas to himself. Experience has taught him that if he shares his ideas with others they will impose their own ego-laden ideas upon his own thinking, creating doubt and confusion within his own mind. He knows this could cloud his thought process and the intuition he has developed over his time in the markets. He in turn has learned to never knock the ideas of other people but to keep his own council knowing that all his investing needs are to be found within himself and the sources of information he has developed over time. 

The solitary investor has learned to view the stock market as a multi-faceted phenomenon that encompasses various investing and even contradictory approaches. He does not see ‘value’ as being necessarily separate from ‘growth’ as an investment philosophy. He has learned that rather than trying to predict what the market will do tomorrow or next week, he is better off paying attention to what the market is doing at the moment and where it might be in its cyclic process. In a bull market (higher highs) it might pay him to examine the new 52 week high list and see what stocks are leading the charge. Conversely in a bear market or correction (lower lows) he has learned to peruse the new 52 week low list to see if the market has put any good stocks up on sale due to forced selling. He will consider his own psychological mindset as an investor when considering these approaches.

Finally he will know that he will not always be successful and that the market will test his resolve and nerve. It may be best at times like these to get away from the market and focus on his other interests knowing that the market is not going anywhere and will patiently await his return. And when he does return he will be both refreshed and renewed while at the same time, being armed with a different and healthier perspective.

And above all he will know that everything comes to the person who has learned how to wait.

Stock Idea…Brookfield Property Partners L.P.

Stock Idea…Brookfield Property Partners L.P.

Symbol : BPY.UN

Exchange: TSX

Market Cap : 6.2 Billion

Revenue : 6.13 Billion
Three Year Revenue Growth : 11.1 %
Investment Type : Big Cap Value/Growth

Price/Earnings : does not apply to limited partnerships

Forward P/E : does not apply to limited partnerships

Price/Book : 0.2

Price/Sales : 1.0

Price/Cash Flow :1.8

Price : 24.55
Investment Stem : My own investment portfolio

                                New 52 week low list

Brookfield Property Partners LP owns, operates, and invests in commercial properties in North America, Europe, Australia, and Brazil. Its operating segment includes Core Office, Core Retail, Opportunistic and Corporate Segments.

Brookfield Property Partners L.P. is a diversified global real estate company. The Company owns, operates and develops a portfolio of office, retail, multifamily, industrial, hospitality, triple net lease, self-storage and student housing assets. Its partnership is Brookfield Asset Management Inc.'s public commercial property entity and the primary vehicle through which it invests in real estate on a global basis. It operates through four segments: Core Office, Core Retail, Opportunistic and Corporate. As of December 31, 2016, its Core Office segment consisted of interests in 142 office properties totaling 99 million square feet. As of December 31, 2016, its Core Retail segment consisted of interests in 127 regional malls and urban retail properties. As of December 31, 2016, its Opportunistic segment consisted of 107 office properties comprising approximately 29 million square feet of office space in the United States, United Kingdom, Brazil and Asia.

The dreaded metrics from Morningstar

http://quote.morningstar.ca/Quicktakes/stock/keyratios.aspx?t=BPY.UN&region=CAN&culture=en-CA&ops=clear

The company’s website…

https://bpy.brookfield.com/en

This investment idea is a limited partnership, not a corporation. It is designed to have the money flow through the company structure in the form of a distribution to the limited partners (shareholders). It is a more tax efficient way of paying dividends to the stakeholders of the company. The parent company owns huge amounts of the stock in this subsidiary of the parent company. That is a good thing as it puts the managers of the company on the same side of the fence as with their shareholders. The Brookfield management team is simply in a class all of their own and are firm believers in the Capital Cycle…see below…

https://nivag18.blogspot.ca/2017/08/the-capital-cycle.html

https://nivag18.blogspot.ca/2017/08/the-capital-cycle-2.html

It pays a dividend (distribution) of 6.54 percent. Rest assured it is safe and will rise over time as it has in the past so the investor will enjoy the advantage of ‘yield on cost’…see below…

https://nivag18.blogspot.ca/2016/04/normal-0-false-false-false_12.html

To give you an example of yield on cost in action, I bought the stock of this company in the summer of 2013. The annual dividend (distribution) rate at that time was 1.04 per annum and in U.S funds. Its dividend rate is now 1.26 per annum. So they have been raising their distribution over time. And even though the stock of this company is at a 52 week low, I am still up over 22 per cent on my original purchase price not even accounting for the rising dividend stream.

The stock is being punished because it is viewed as an income stock and people are afraid that the rising interest rates will hurt it. They are ignoring the fact that this company can raise their rents in tandem with the rise in interest rates. I’ve talked a lot lately about buying quality merchandise at bargain sale prices. You are looking at an example of that here. This is a stock to buy and lock up. You are getting a great price and partnering up with as good a management team as there is in the world. Needless today I am a big fan of the Brookfield complex of companies.

The great thing about the Brookfield group of companies is their transparency of information and how they communicate the operations and developments of their business...below is BPY.UN's latest quarterly letter to its unitholders...

 https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR/letters-to-unitholders/2017/bpy-q417-ltu.pdf

One additional point, the Canadian dividend credit will not apply to this stock as it pays out a distribution, not a dividend. So if you are interested in buying it, it would be a better fit for your RRSP as the distribution payments will be shielded from the tax man..and as always, check things out for yourself before buying or discuss this idea with your investment advisor. 

I do not Strive, but I am Guided

I do not Strive, but I am Guided

As time passes by and your experience in the market accumulates, you will slowly begin to realize there is no need to reach out and grab for something you want. The market itself will present you with investing opportunities if you sit back and wait and let them come to you, like a newspaper delivered to your door. And they will come to you, you just have to be patient and alert, aware of the fact that if you position yourself in a certain place there is no need to reach out for anything because it is already there. You may have scanned the 52 week new low list and noticed a new entry, a stock you have researched in the past but thought it too expensive at the time. Now for some reason it has hit a new low. Perhaps it is deserved but in this market where short-terminism is everything, it may be an opportunity to buy some quality merchandise at a cheap price and the cheaper the price you pay for a stock, the greater your margin of safety will be. This can act as a psychological cushion later on and lessen the chance of you being shaken out of your position due to some market volatility. 

As you gain experience in the market you will come to know that everything will be alright and that a force greater than yourself will guide you if you will only will sit back and surrender to it. There is no need to strive and reach out for anything because you know you are guided by something greater than yourself that is already a part of you.

Howard Marks on the Markets, Two

Howard Marks on the Markets, Two

Widespread disregard for risk creates great risk. “Nothing can go wrong.” “No price is too high.” “Someone will always pay me more for it.” “If I don’t move quickly someone else will buy it.” Statements like these indicate that risk is being given short shrift. This cycle’s version saw people think that because they were buying better companies or financing with more borrower-friendly debt, buyout transactions could support larger and larger amounts of leverage. This caused them to ignore the risk of untoward developments and the danger inherent in highly leveraged capital structures.

Inadequate due diligence leads to investment losses…The best defence against this is thorough, insightful analysis and insistence on what Warren Buffett calls “margin of safety.” But in hot markets, people worry about missing out, not about losing money, and time-consuming, sceptical analysis becomes of the province of old fogeys.

In heady times, capital is devoted to innovative investments, many of which fail the test of time. Bullish investors focus on what might work, not what might go wrong. Eagerness takes over from prudence, causing people to accept new investment products they don’t understand. Later, they wonder what they could have been thinking.

Hidden fault lines running through portfolios can make the prices of seemingly unrelated assets move in tandem. It’s easier to assess the return and risk of an investment than to understand how it will move relative to others. Correlation is often underestimated, especially because of the degree to which it increases in a crisis. A portfolio may appear to be diversified as to asset class, industry and geography, but in tough times, non-fundamental factors such as margin calls, frozen markets and a general rise in risk aversion can become dominant, affecting everything similarly.

Psychological and technical factors can swamp fundamentals. In the long run, value creation and destruction are driven by fundamentals such as economic trends, companies’ cash flows, demand for products and the skilfulness of management. But in the short run, markets are highly responsive to investor psychology and the technical factors that influence the supply and demand for assets. In fact, I think confidence matters more than anything else in the short run. Anything can happen in this regard, with results that are both unpredictable and irrational.

Markets change, invalidating models (for every solution there is another problem). Accounts of the difficulties of “quant” funds center on the failure of computer models and their underlying assumptions. The computers that run portfolios attempt primarily to profit from patterns that held true in past markets. They can’t predict changes in those patterns; they can’t anticipate aberrant periods; and thus they generally overestimate the reliability of past norms.

Leverage magnifies outcomes but doesn’t add value. It can make great sense to use leverage to increase your investment in assets at bargain prices offering high promised returns or generous risk premiums. But it can be dangerous to use leverage to buy more of assets that offer low returns or narrow risk spreads — in other words, assets that are fully priced or overpriced. It makes little sense to use leverage to try to turn inadequate returns into adequate returns.

Excesses correct. When investor psychology is extremely rosy and markets are “priced to perfection” — based on an assumption that things will always be good — the scene is set for capital destruction. It may happen because investors’ assumptions turn out to be too optimistic, because negative events do occur, or simply because too-high prices collapse of their own weight...

Most of these lessons can be reduced to just one thing: be alert to what’s going on around you with regard to the supply/demand balance for invest-able funds and the eagerness to spend them.

Howard Marks on the Markets

Howard Marks on the Markets

The best lessons are about learning what not to do. Great investors like Buffett and Klarman and others drill home the point of avoiding big mistakes. They understand how a loss can be compounded by a mental or emotional misstep, making recovery that much harder.

Like a lot of us, the great investors start out learning this first-hand. Painful experience — from time in the market — can be a great teacher. Mistakes are part of the process.
But they quickly realize there are more efficient, less painful ways of learning from other’s mistakes. As Howard Marks says, you just have to pay attention:

The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.

The great thing about hindsight is, it always points out what everyone did wrong.
At the end of 2007, Howard Marks relayed the many lessons he’d seen over the years, as it related to the financial crisis. He realized those lessons weren’t limited to the financial crisis but contributed in some way to investor losses in all market cycles.

Here are some of the lessons about the markets Howard Marks shared in his book, The Most Important Thing...

Too much capital availability makes money flow to the wrong places…When capital is scarce and in demand, investors are faced with allocation choices regarding the best use of their capital, and they get to make their decisions with patience and discipline. But when there’s too much capital chasing too few ideas, investments will be made that do not deserve to be made.

When capital goes where it shouldn’t, bad things happen. In times of capital market stringency, deserving borrowers are turned away. But when money’s everywhere, unqualified borrowers are offered money on a silver platter. The inevitable results include delinquencies, bankruptcies, and losses.

When capital is in oversupply, investors compete for deals by accepting low returns and a slender margin of safety. When people want to buy something, their competition takes the form of an auction in which they bid higher and higher. When you think about it, bidding more for something is the same as saying you’ll take less for your money. Thus, the bids for investments can be viewed as a statement of how little return investors demand and how much risk they’re willing to accept.

Manager Insight

Manager Insight

PenderFund all-cap manager seeks out unloved stocks

"Micro corrections" present opportunities, says Felix Narhi.

With roots in the venture-capital arena, PenderFund Capital Management Ltd. gravitated to the small-cap space, mainly because of the abundant opportunities to find attractive, little-followed smaller companies. That focus has broadened in the past few years to the all-cap universe, which presents unloved stocks that the firm says are ripe for the picking.

"We began in 2003 as a venture-capital private-equity firm investing in smaller companies in British Columbia," says Felix Narhi, chief investment officer of the Vancouver-based firm, which manages about $720 million. "This knowledge base was transferred into the smaller-company space. Once Pender became a prospectus-based fund company in 2009, it was a natural progression. There are more opportunities because fewer people are following small companies, which tend to be more misunderstood."

A 14-year industry veteran who joined PenderFund in 2013, Narhi's roles include portfolio manager of the $20-million Pender US All Cap Equity and co-manager of the flagship $283-million Pender Value. Narhi stresses that, personally, he is size-agnostic and focuses on all-cap stocks, "albeit I recognize that there tends to be better opportunities in smaller-sized companies."

Still, he notes that the flagship Pender Value is a "best ideas" portfolio which draws on input from the entire PenderFund investment team and contains some of his high-conviction ideas sourced from the U.S. all-cap investment universe. (In contrast, PenderFund CEO Dave Barr, who is lead manager of Pender Small Cap Opportunities, gets his best ideas from the Canadian micro-small-cap universe.)

Narhi, who holds a bachelor of commerce degree from the University of British Columbia, seeks to identify individual companies that have had what he describes as "micro corrections," by which he means price drops that are specific to that stock rather than driven by a general market downturn.

It's the unloved names that particularly attract Narhi. Take, for instance,  Wynn Resorts Ltd. (WYNN), which operates hotels and casinos. The stock peaked in 2014 at about US$246 in 2014, but crashed to about US$55 in late 2015 when a Chinese crackdown on corruption impacted its revenues in Macao. At that point, the stock was a mid-cap name. "The stock was clearly unloved and we bought it in the low US$60s."

Late this January, as the stock appeared to be richly priced, and peaking above US$200 per share, and coinciding with sexual harassment allegations levelled at CEO Steve Wynn, Narhi sold off the remaining position. "The facts had changed around the story. So we took our money off the table."

As a value-oriented stock picker, Narhi favours companies that are selling below their intrinsic value. Moreover, he has a bias to companies run by their founders. In particular, he seeks so-called predictive attributes which the market undervalues. "We tend to hold a lot of owner-operators," says Narhi. Referencing a study by management-consultancy Bain & Co. concluding that between 1990 and 2014 founder-owned companies produced three times more wealth than manager-run companies, Narhi adds: "To us, that's material."

One high-conviction example in Pender Value, is  Baidu Inc. (BIDU), held as an American Depository Receipt, which has a market cap of US$88 billion. Although it's a large-cap stock, Narhi points out that it is relatively small compared to mega-giants such as  Facebook Inc. (FB). The Chinese multinational, which specializes in Internet-based services, is run by founder Robin Li and is regarded as the Google of China. "It had a hiccup in the core business of search advertising," says Narhi, adding that the stock fell on accusations by a fatally ill user that the company was guilty of misleading advertising.

Bought in the spring of 2017 for about US$170, the stock is up close to 50%. But Narhi believes there is more upside, based on Baidu's investment in areas such artificial intelligence (AI). "It is the leader in China and the Chinese government is backing it," says Narhi, adding that the stock is also undervalued because it has stakes in IQIYI, the largest online video service in China, as well as other interests. "It also has stakes in some private technology companies in China. They might be worth a lot in 10 years. Right now we're getting them for free."

Another favourite name held in Pender Value and Pender US All Cap Equity is  Platform Specialty Products Corp. (PAH), a U.S.-based mid-cap producer of specialty chemicals that is focused on the industrial and agricultural markets. Because of its significant reliance on emerging markets, its stock has been hit. "They bought a lot of companies using debt and then the markets turned. Investors soured on companies with high financial leverage. So there have been a lot of headwinds. We accept there are good cycles and bad cycles. If the tide is too tough, it doesn't matter how good a swimmer you are."

Yet Narhi believes the tide has turned because emerging markets are recovering and the currency effect, which hit Platform Specialty Products when earnings were translated into U.S. dollars, has diminished. Moreover, this coming summer the company is expected to split into two parts, a plan that most investors have applauded. With the stock trading at about US$10.60, Narhi believes it could double within two to three years.

From Mornstar's website...

Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

Stock Idea…Maxar Technologies Ltd

Stock Idea…Maxar Technologies Ltd

Symbol : MAXR

Exchange: TSX

Market Cap : 3.4 Billion

Revenue : 1.6 Billion
Three Year Revenue Growth : -3.4 %
Investment Type : Mid Cap Value/Growth

Price/Earnings : 19.4

Forward P/E : 10.3

Price/Book : 1.3

Price/Sales : 1.2

Price/Cash Flow : 9.4

Price : 60.59
Investment Stem : My own investment portfolio
                                 New 52 week low list

Maxar Technologies Ltd is an integrated space and geospatial intelligence company with a full range of space technology solutions for commercial and government customers including satellites, Earth imagery, geospatial data and analytics.

Maxar Technologies Ltd is Canada-based global communications and information company providing operational solutions to commercial and government organizations worldwide. The Company is focused on markets and customers with repeat business potential, primarily in the Communications sector and the Surveillance and Intelligence sector. Communications sector, offers space-based solutions for cost-efficient global delivery of direct-to-home television, satellite radio, broadband internet, and mobile communications; Surveillance and Intelligence sector, offers end-to-end solutions to monitor and manage changes and activities worldwide. The Company conducts an advanced technology development operating from a number of locations in the United States, Canada, and internationally.

The dreaded metrics from Morningstar…

http://quote.morningstar.ca/Quicktakes/stock/keyratios.aspx?t=MAXR&region=CAN&culture=en-CA&ops=clear

The company’s website…

https://mdacorporation.com/

The old MacDonald Detweiler now renamed Maxar Technologies Inc. They were primarily involved with the manufacturing of satellites which was a pretty lumpy business. They just acquired DigitalGlobe which is a digital imaging business in the US. This should prove to be a synergistic acquisition which will open a lot of doors to them in the US market. They are almost moulding the hardware and the software of the global GPS satellites. There are lots of commercial applications coming on in industrial applications, as well as government. Has just undergone a huge sell-off in the market after missing their quarterly numbers. Maxar’s stock now trades at just 12.3 times fiscal 2017 adjusted EPS of US$4.16 and a mere 11.1 times the median of its EPS outlook of US$4.50-4.70 for fiscal 2018, both of which are very inexpensive given its explosive long-term growth potential...the CEO among other officers of the company have just bought some shares for themselves after the sell-off.

Covered my Short Today

Covered my Short Today

I liquidated my short today (sold the ETF…RWM which shorts the Russell 2000 index) and reinvested the proceeds. I ended up losing $2,000 Canadian on it after holding it for almost a year. I was down $3,000 on it a month and a half ago so it could have been worse. It was an interesting experience putting that hedge on but I don’t think I’ll do it again. Next time I’ll just go to cash. There were several opportunities to invest in things that were beaten down while I held that short, but because my money was tied up in the short I was unable to take advantage of those opportunities. Anyway chalk it up to experience, I know I have that behind me now. In hindsight it turned out to be an expensive piece of insurance but I had the right idea (managing my risk), so even though the outcome was a disappointment for me, the important point was the process of managing my risk has been further incorporated into my world view of investing in the stock market.

I redeployed the money buying into MAXR (aerospace) and IFC (casualty insurance), both listed on the TSX. They both have sold off of late, especially MAXR. I’ll probably write them up as investing ideas in the next few days as I just bought them.

I’ve been at this nine years now and I’m learning. The market will teach you over time if you’re willing to learn. Just wish I could start all over again, knowing what I know now. Investing is a craft and you have to practice that craft like any other.